Economics at the FTC: the Google-Doubleclick Merger, Resale

Economics at the FTC: The Google‐DoubleClick Merger, Resale Price Maintenance, Mortgage Disclosures, and Credit Scoring in Auto Insurance Micheal R. Baye Matias Barenstein Debra J. Holt Pauline M. Ippolito James M. Lacko Jesse B. Leary Janis K. Pappalardo Paul A. Pautler Michael G. Vita Abstract: Economics at the Federal Trade Commission (FTC) supports both the competition and consumer protection missions of the agency. In this year’s essay we discuss competition activity with a summary of our work on the Google-DoubleClick merger and recent activity on resale price maintenance, an area in which FTC economists had done significant prior research. On the consumer policy front, we discuss our study of ways to improve mortgage disclosures to facilitate consumer shopping and competition. Finally, we discuss our study of the effects of credit scoring on prices paid for auto insurance with a focus on the effects of scores on different racial and ethnic groups. Keywords: antitrust, consumer protection, credit scores, FTC, insurance, mergers, mortgage disclosures, race and ethnicity, and resale price maintenance. Federal Trade Commission, Bureau of Economics, 600 Pennsylvania Ave. N.W. Washington, DC 20580, U.S.A. Author for Correspondence. Tel.: 202-326-2550; FAX 202-326-2380; E- mail: [email protected]. We thank Jacqueline Westley for editorial assistance. The views expressed are those of the authors and do not necessarily represent those of the Federal Trade Commission or any individual Commissioner. Note: a final version of this paper was published in the September 2008 issue of the Review of Industrial Organization (33:3) pages 211-230. 1. INTRODUCTION The Federal Trade Commission’s (the FTC or the Commission) Bureau of Economics (BE) is composed of about 70 Ph.D.-level economists, a small group of accountants, and 25 other staff (including research analysts) who support the FTC’s two missions of promoting competition (antitrust) and protecting consumers. The bulk of the work done by the Bureau is related directly to law enforcement activities, such as case investigation or litigation support. Other activities involve policy analysis and research related to the missions. That research buttresses our efforts in promoting competition-based policies at the state and federal levels and in fostering coordination in policy development and law enforcement around the globe. Although BE provides the Commission with its own recommendations based on the economics of various cases and policy matters, the Commission also receives separate legal recommendations from attorneys in other Bureaus and Offices within the FTC. Ultimately, these recommendations are merely inputs in the production process; the FTC’s policies are formally determined by the votes of Commissioners, and they are not bound by the recommendations of any Bureau or Office. Last year’s contribution to the Antitrust and Regulatory Update issue of this Review focused on potentially anticompetitive patent settlements in pharmaceutical markets and the implications of behavioral economics for consumer protection policy. This year we focus on the Google- DoubleClick merger, resale price maintenance policy, and on consumer issues involving improved mortgage disclosures, as well as the effects on minorities of the use of credit histories in the sale of auto insurance. Before initiating that discussion, we note that economists at the FTC have been active in several areas this year, including merger review and international policy coordination and training. In the international sphere, we provided inputs to international organizations to help refine and coordinate competition and consumer policies across borders to the advantage of both firms and consumers worldwide. We also continued to participate in training efforts in both competition and consumer protection economics to help other nations better understand how we handle those issues. 2 On the merger front, the dollar volume of general merger and acquisition (M&A) activity fell substantially as the credit crunch of mid-2007 worked its way through private equity markets and into the more mainstream mid-level M&A areas. Still, we reviewed 31 mergers in great depth last year and the agency challenged all or some aspect of 20 of those transactions. That compares with an in-depth review of 55 and 58 mergers in the peak recent review years (1990 and 1995) and challenges or abandonments in 33 and 43 of those instances, respectively. This past year we also revised BE’s organization to reflect more accurately the important role that research and policy R&D plays in our contributions to the missions of the Commission. This reorganization will further enhance our human capital by expanding the set of BE staff that is able to undertake work on agency-related projects that will build skills and knowledge we need for the future. In connection with that effort, we are hosting our first annual academic-style Industrial Organization conference in November 2008. Our call for papers reaches out to scholars working in a number of applied microeconomic fields that are vital for the FTC’s antitrust and consumer policy missions, including dynamic oligopoly, horizontal and vertical mergers, bundling, loyalty discounts, intellectual property, online advertising, information disclosure, and behavioral and experimental economics. Several leading academic economists agreed to serve as our scientific committee and to participate in the conference. This annual conference will facilitate stronger interaction with academic economists and make them more aware of the theoretical and empirical questions that are important in our antitrust and consumer protection missions. In addition to potentially influencing academic research agendas, the conference will permit our economics staff to enhance their own human capital and to stay abreast of recent developments in the field. 2. GOOGLE’S ACQUISITION OF DOUBLECLICK, INC. In 2007 the FTC investigated, and eventually approved without condition, Google Inc.’s acquisition of DoubleClick, Inc. This transaction attracted an unusual level of attention from third parties, a number of whom participated in high profile public discussions of the competitive merits of the transaction, in which numerous (sometimes conflicting) theories of competitive 3 harm were proposed.1 After thoroughly investigating all of the proposed theories of harm, the FTC ultimately concluded that none could justify an enforcement action against the transaction.2 Below, we summarize briefly the various theories of competitive harm investigated by the FTC, and discuss why the FTC concluded that the transaction was unlikely to reduce competition in any relevant antitrust market.3 2.1. The Parties and the Products This transaction involved two firms that participate, in very different ways, in Internet advertising. Google receives most of its Internet advertising revenue from the sale of sponsored “search ads;” it receives a smaller portion from its advertising intermediation business, described in greater detail below. DoubleClick, by contrast, does not sell advertising space; rather, as we will discuss, DoubleClick is an “ad server;” i.e., it sells services complementary to the sale of advertising space. Generally speaking, virtually all Internet advertising space is sold either directly to advertisers by the website publisher (e.g., CNN.com), or indirectly through online intermediaries. Typically, the “premium” space on a popular website (e.g., ads on the home page for a popular website, such as CNN.com) will be sold directly by the website publisher to an advertiser. “Non- premium” ad space (i.e., space that is less desirable from an advertiser’s perspective, either because of its location on the web page, or because it is on a less popular website), is usually sold through third-party ad intermediaries, who sell the space to advertisers that are unwilling to incur the high cost of premium ad space. These intermediaries consist of “ad networks” and “ad exchanges.” Ad networks and ad exchanges offer similar intermediation services, and differ 1 For example, in July 2007 the Brookings-AEI Joint Center sponsored a conference entitled “The Economics of Internet Advertising: Implications for the Google-DoubleClick Merger,” http://www.aei.org/events/eventID.1539/event_detail.asp. 2 Several months later, the EU reached a similar conclusion; see European Commission (2008). See also Neven and Albaek (2008). 3 The case was not devoid of controversy within the FTC. The December 2007 vote to allow the merger to proceed unchallenged was 4 to 1 with one Commissioner (Harbour) writing a dissenting statement and another Commissioner (Leibowitz) concurring in a separate statement. 4 only in the way that prices for ad space are set. Ad networks purchase inventory from publishers and sell it to advertisers, taking a share of the difference; ad exchanges conduct dynamic auctions for publisher inventory and take a share of the winning bid. Google’s ad network is known as “AdSense for Content,” or simply “AdSense.” The advertising inventory sold by AdSense consists almost entirely of space on small to medium-sized websites, plus less desirable “remnant” space on larger sites. Its customers are typically small advertisers who place text-link ads into low value advertising space. AdSense utilizes contextual targeting that places ads that relate to the content of a web page on which the ad is shown.4 Advertisers buy advertisements from AdSense by bidding for “keywords” in Google’s

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